A Rare Opportunity to Profit from Pharma Stocks

"...money lost isn't the same as money gained. Losses feel at least twice as painful as gains feel pleasant.

...Ask people if they want to take a risk with an 80% chance of success, and most say yes. Ask instead if they'd incur the same risk with a 20% chance of failure, and many say no."

These were the words of Late Daniel Kahneman, the Princeton professor of psychology, who won the Nobel Prize in economics for his pioneering work in behavioural finance.

Kahneman, who passed away recently, elaborated in his best-selling book, Thinking, Fast and Slow, how investors react to the prospect of profits and losses.

The reason I am referring to this is because stocks from the pharma sector have found a sudden surge in investor interest of late.

Pharma companies, unlike their counterparts in the healthcare industry have a very unpredictable earnings cycle.

New drug launches could possibly bring in blockbuster revenue. Loss of patents or patent led litigations can cause revenue to nosedive.

To add to that regulatory embargo like the US FDA warnings are additional dampeners. So, investors have been way too hesitant about pharma stocks over the years.

Just as Kahneman explained, the prospects of loss have kept investors more wary than the greed of gains.

So, what has changed?

Well, the prospects of pharma stocks globally are tied to what is called the patent lifecycle of drugs.

The last phase of this lifecycle in the US generics market is known as 'Patent Cliff'. This is when products go off-patent i.e. they lose the regulatory exclusivity on selling a particular drug.

After this phase the drugs become 'generics', a category that Indian pharma companies have developed expertise in.

Drug makers in India have been making generic versions of the off-patent drugs for decades, at a fraction of the cost.

The last time such a patent cliff occurred in the US during 2011-15, when generic competition emerged for several large pharmaceutical products.

The competitive pressures in the US generics business intensified following the previous patent cliff in 2015. Pricing deteriorated as players fiercely competed for market share in older products.

The entry of new players, including many from India, further heightened the competitive landscape.

A similar environment is shaping up now, with an anticipated wave of another patent cliff on the horizon between 2024 and 2028.

Drug patent expiration is notably one of the reasons for the growth of generic drugs. As the drug going off patent reduces healthcare costs, the worldwide demand for generic drugs continues to grow.

With India having a robust pipeline of generic drugs, this upcoming cliff will provide a tremendous growth opportunity for Indian pharmaceutical companies.

Further, major Indian players have taken proactive steps by filing Abbreviated New Drug Applications (ANDAs) to seize upcoming opportunities in the small molecule patented drugs segment.

The patent-cliff, which exposes large, patented pharma products to generic competition, is expected to generate additional revenue for the entire generic pharma industry.

This is likely to increase global interest in such companies, thereby opening up investment opportunities for the generic drug sector in India.

An upscaling in products will also pave the way for R&D investments in generic pharma companies in India.

Meanwhile, Biocon has won approval from the UK regulator for the first generic version of an injectable drug, which is losing patent protection in November 2024.

Novo Nordisk's weight loss drug, is among the first anti diabetes - anti-obesity medications to lose patent protection.

Several pharma companies are eager to enter this segment of market, which is expected to touch US$ 100 billion by 2030.

Of course, Biocon will not be the only Indian generics company to offer drug cheaper in the Indian market. Biocon's competitors Sun Pharmaceutical, Dr. Reddy's Lab and Cipla are also developing their anti-obesity drugs.

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But Biocon could have an exclusivity period for the generic drug or a first mover advantage.

Of course, this is just one of the drugs that is set to lose patent this decade.

Smaller Indian pharma companies with a larger exposure to the US market, including Zydus Lifesciences, Torrent Pharma, Aurobindo Pharma, and Ajanta Pharma, are expected to be the primary beneficiaries of this patent cliff.

While the sharp drop in pricing of generic drugs remains a risk, Indian pharma companies that could tap into the opportunity profitably stand to win favour amongst investors over the next few years.

Check out the best pharma stocks on the Equitymaster Screener.

Warm regards,


Tanushree Banerjee
Editor, StockSelect
Equitymaster Agora Research Private Limited (Research Analyst)